To The Moon

Covered Calls ETFs

I've been buying RYLD regularly for a year plus, as I was pretty much attracted to its purportedly high monthly dividend payout with a dividend yield of around 11% to 12%. That should give me around 8% returns after withholding tax deductions. The low prices also meant that I could buy in bit by bit, month in month out without much commitment. 

After monitoring the stock holdings I have in RYLD and the net position after taking the dividends into consideration, I noticed that it had been mostly in the red to at most borderline profitability much to my chagrin.

Although the monthly dividends were nice, the share price had been dropping consistently. So I went and did a simple comparison between the more popular covered calls ETFs to see if I've made a wrong investment choice.

Attached is a table comparing between $Global X S&P 500 Covered Call ETF(XYLD)$  , $NASDAQ 100 Covered Call ETF(QYLD)$   and $Global X Russell 2000 Covered Call ETF(RYLD)$  , their dividend yield after withholding tax and annualised net returns using prices across 1 to 4 years, covid low and at inception against last traded price on 17th Nov 2023.

From the table, it seems that RYLD has a consistently better dividend yield while XYLD consistently gives lesser dividends compared to the other two ETFs.

I looked further into their price movement charts and saw that XYLD had quite a lot of fluctuations but the price has stayed generally the same on the average.

However, for RYLD and QYLD, their share price seems to be on a permanent downward trajectory.

Personal Conclusion

I personally feel that XYLD would be the best pick among these 3 ETFs even though the payout seems to pale in comparison. Dividend payout is attractive for income seekers, but if capital were to be eroded over time as the share price depreciates steadily, it would defeat the purpose of investing for the dividends.

XYLD appears to be the most stable in terms of average share price and gave the best average annualised returns at 4.732% since inception.

Hence, I would recommend XYLD out of these 3 for those income seeking investors.

That said, it's still best to invest in S&P 500 Index Funds if held for long term.

The historical average annual return for the past 10 years is 10.083% (not including dividends).

The historical net average returns including dividends is 11.48% after taking withholding tax into consideration.

These index funds also have very much lower expense ratios compared to covered calls ETFs.

The usual downside of it is having to fork out hundreds of dollars just for a single share.

For investors who wish to invest a bit by a bit every month could perhaps look into $SPDR Portfolio S&P 500 ETF(SPLG)$  instead.